Thursday, April 8, 2010

Limits to growth: Apollo Asia Fund - the manager's report for 1Q2010

Our concern is over future earnings, given the precarious state of the global economy and doubtful prospects for Asia's exports. Since none of the major problems exposed by the crisis has been addressed, and panic responses have created new ones, major turbulence seems likely to resume. Many of the stocks in our universe are priced on cheery assumptions of business-as-usual: a less complacent view restricts our choices considerably.

Furthermore, the customary assumptions of long-term trend growth for the world, looking out beyond the business cycles to the next 10-30 years, seem increasingly hard to justify given the growing evidence that we are on this timeframe running up against hard limits to availability of resources. It is ironic that we should reach this point just as the pursuit of GDP has become the consensus goal of governments around the world. Continual GDP growth is an absurd goal, bearing little relationship to quality of life, and treating the consumption of assets as a positive. It may now become an impossible goal, not just because of the looming debt traps, but because GDP growth has historically been accompanied by more and more energy usage, and that may no longer be possible. The ability of oil producers to increase output each year is increasingly in question - and the interest of oil-producing countries in nuclear power suggests that many see their own supply falling short of demand within the next 10-20 years. For a long time, limits to growth were far enough away to be beyond the practical horizon of investment calculations, but that is no longer the case.

Asia, at lower levels of per-capita consumption and less constrained by legacy debt, may well be able to outbid the OECD and continue to increase its share of energy and other resources traded. However, leaving aside the impact on export markets, it may not always be just a matter of price, and it cannot be assumed that Asia will always be able to obtain the absolute quantities of resources to sustain the levels of growth to which it has become accustomed. Moreover, those countries which have been subsidised by windfall resource endowments may face shocks when they become net importers.